Stock Market Today

Following the brutal sell-off in stock markets last week, futures in the United States and in Europe are trading mostly higher today. The main reasons for the bloodbath were high expectations for aggressive interest rate hikes in 2022, mixed earnings reports, and cautious future guidance from banks. These factors compelled investors to rebalance their portfolios in anticipation of higher interest rates in the coming months, prompting a drop in technology stocks and dragging the Nasdaq index down nearly 385 points. The S&P 500 also fell below its critical 200-day moving average.

In Friday’s session, the Dow Jones Industrial Average fell 1.30%, while the S&P 500 index dropped 1.89%. The Nasdaq, the tech-savvy index, dipped 2.72%, and the Russell 2000 slumped 1.78%.

This week is critical for stock markets because a slew of economic reports is due to be released, as well as the Fed’s monetary policy for the coming months, with investors expecting hints on the highly anticipated interest rate hikes.

Over the next few days, earnings reports of big technology companies such as Apple, Microsoft, and Tesla are set to be released, while those of IBM are set to be published today. These reports are likely to stir volatility in stock markets in today’s session.

Today, investors should pay close attention to purchasing managers’ index data from Germany and the United States. This data is important because purchasing managers typically have the most up-to-date information about the economy’s future outlook, and thus investors can use it to understand how stock markets may potentially fluctuate in the short term.

Stock Market

Last week, technology stocks took a beating as investors expect the Federal Reserve to raise interest rates more aggressively to combat rising inflation, which is still on the rise. Treasury yields have risen in response to rising interest rate expectations. The 10-year Treasury note yield is currently hovering around 1.774%, having increased by nearly 0.25% this year. Because valuations of technology companies are heavily reliant on rapidly growing future cash flows, higher interest rates will likely reduce the present value of these companies’ future cash flows, causing their stock prices to fall. This is exactly what we have been seeing in recent sessions.

Liquidity being rapidly withdrawn from the American economy has propelled investors to be wary of riskier assets. This is why we are witnessing steep declines in crypto prices, with the ill-famed Bitcoin dropping to nearly $35,000. This is about half of its peak price, reached in November last year. Stock traders are now leaning more towards stocks of value and cyclical companies, which are more correlated to economic growth.

In addition to fears of rising interest rates, mixed earnings reports have also caused investors to worry about future of the American economy. Earnings of banks, specifically, spooked investors as they came in below expectations and warned investors of lower EPS in 2022, driving their respective stock prices down.

Cryptocurrencies

Similar to the broader equity markets, crypto markets have also been in turmoil over the past few weeks. Bitcoin, the king of cryptocurrencies, has dropped from nearly $69,900 in November, to $35,000 as investors rush away from risky and speculative assets. The slump in the digital sector was further aggravated by margin positions that investors had to get rid of to pay off their margin loans amid the selling spree.

The recent decline in crypto markets cost them nearly $1 trillion, while Bitcoin lost nearly $600 billion in market value. Over the weekend, Bitcoin fell 7.2%, trading as low as $34,042 on Saturday, before rising back up again above the $35,000 mark. During the same period, Ethereum also dropped 12%, while Cardano and Solana dipped nearly 17%.

Moving forward, digital assets are likely to remain volatile as the Fed communicates its monetary policy for the coming months and hints at how it plans to raise interest rates in the short term. Furthermore, reports indicate that Washington is planning to release its plan for dealing with cryptocurrencies as early as February and will ask authorities to begin weighing the benefits of the digital sector against its potential threats.

Oil

Crude oil prices dropped last week following the release of crude oil inventory data by the U.S. The Energy Information Administration (EIA) According to the report published by the EIA, American oil inventories surged to 413.8 million barrels, rising by nearly 515,000 barrels. This uptick in inventories is against expectations of 800,000 barrels. Another reason for the dip in oil prices is profit taking by investors who capitalised on the opportunity as crude oil prices reached their highest level in seven years last week.

Gold

Gold prices moved up last week following the turmoil in broader financial markets, forcing investors to take shelter and invest in safe-haven commodities until market sentiment stabilises to some extent. The price of the precious metal is currently hovering around $1,837. However, investors should understand that the upcoming interest rate hikes to be carried out by the Federal Reserve are likely to make it difficult for the yellow metal to maintain itself above the $1,800 mark as rising rates increase the opportunity cost of holding the precious metal, making it less appealing for investors to hold.

Asian Pacific Markets

The central bank of China is trying to stimulate its economy by reducing its interest rates for the first time since 2020, and also adopting policies to encourage banks to speed up their lending activities. These steps are being taken to give a boost to the second-largest economy in the world after its economic growth slowed down because of the real estate debacle in 2021 and recurring coronavirus outbreaks.

As of 12.00 a.m. EST, the Nikkei jumped 0.02% and the Shanghai index hopped 0.20%. The Hang Seng index, in Hong Kong, fell 0.92%. The ASX 200 index dipped 0.45% and the Seoul Kospi slumped 1.49%.